The Investment Column: JJB is still goal-orientated, but investors say it's a long-ball game, not a quick net result
Alizyme; Premier Oil
Wednesday 21 May 2008
Our view: Sell
Share price: 124.25p (-3p)
Wigan Athletic football club, which is sponsored by retailer JJB Sports, narrowly avoided relegation from the premiership this season. Sadly for JJB, the team is about the only thing that is not going down.
At an initial glance, there is very little in JJB to commend to investors. Sales were down 8 per cent in the 13 weeks to the end of April, according to yesterday's trading update; revenues were down 8.3 per cent.
On a valuation basis, things do not look much better. According to analysts at Dresdner Kleinwort, JJB trades at 14 times estimated 2009 earnings, which is a premium to a host of retail stocks including Clinton Cards, Halfords and Mothercare. The group's gearing is so high that a 1 per cent change in sales leads to a 10 per cent move in operating profit. In short, things are not looking that great, particularly as most observers reckon that the country's economic problems are not going away any time soon.
All bad news, then? Well, not so fast. Yes, the group is toiling and investors would be crazy to buy the stock hoping for an immediate return. But the analysts at Dresdner still have the group at hold, saying that the potential recovery story is good. The group has closed loss-making stores, especially in areas where the company has out-of-town shops and is trying to avoid being an entirely retail entity by opening a series of health centres. Furthermore, JJB, which has previously relied on the major summer football tournaments to sell replica shirts, is trying to rid itself of that model, which is just as well given that England will be conspicuous by its absence from this summer's European championships.
Investors should also be buoyed by the fact that the group is 22.3 per cent owned by Icelandic fund Exista, and while they are not expected to launch a takeover bid, the holding should provide a backstop against the shares falling through the floor.
The recovery story is good. But recovery has not started yet and analysts are still complaining about a lack of visibility. JJB might be a solid, longer-term punt, but not for now. Sell.
Our view: Buy
Share price: 26.5p (-1.5p)
For biotech firms to go from a being a small scientific organisation to a successful pharmaceutical group (or more likely, be bought up a pharma giant) they need some of their ideas to succeed. And that is why the stock was sent spiralling on news in April that Alizyme's treatment for irritable bowel syndrome, Renzapride, had failed its phase-three trial.
The group's shares have been on a downward trajectory since, after hitting year highs of 105p last June. However, observers are not as downbeat as you might expect. True, those at Investec, who revised their price target from 41p to 59p on the bad Renzapride news, say that given where the shares trade, the stock is theoretically a hold.
However, the analysts advise clients to buy the stock. The reason is the group's other potential blockbuster, the anti-obesity and type 2 diabetes drug Celilistat, which is expected to win "a major licensing deal... in the near future. We therefore recommend buying on weakness", they say.
Finn Capital points out that the group has raised £10m from institutional lenders to remain a going concern and, "this demonstrates institutional confidence in Alizyme's ability to deliver", they reckon.
The truth is that buying into smaller biotech companies is always a punt. Those with a nervous disposition should avoid the sector that depends largely on companies with sound ideas transforming good science into a commercially viable treatment. The failure list is long.
However, while analysts are all too happy to point out a basket case when they see one, none ascribes that moniker to Alizyme, which is also set to receive third phase results on another treatment, Colal-Pred, for ulcerative colitis, in July.
Biotech valuations are largely driven by news flow. Alizyme is expecting lots in the next few months, and most of it is likely to be good. Buy.
Our view: Buy
Share price: 1738p (-9o)
Back in March, The Investment Column suggested that buyers should back Premier Oil at 1343p. And despite the jump in the stock since then, investors would still be well-advised to get more.
With the black stuff at almost $130 a barrel and rising, most oil companies are doing well. Tullow Oil's shares jumped massively a couple of weeks ago on news that it had confirmed a major new find off Ghana.
The same could well be about to happen to Premier Oil. In a trading update, the group yesterday revised its target of 50,000 barrels a day (bpd) to 80,000 bpd by 2012, saying that its exploration activities in Vietnam, in an area where the group has done well in the past, were on course.
Analysts at Evolution Securities, who are in the process of upgrading their estimates, say that a strong news flow, coupled with the high oil price, will drive the stock up. The group, they say is still cheap compared to the sector, which includes companies such as Tullow and Cairn Energy. Buy.
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